#24 Patterns and Scale
Values Change At Scale
"Values change at scale"
Garret Hardin
Sometimes it's very easy to make people a lot more money. Also, did you know that a mouse cannot be the size of an elephant?
Those two sentences are related.
Hear me out.
First, imagine an elephant and a mouse standing next to each other. Then imagine scaling the mouse up to be the same size as the elephant. That is a mouse that is the size of an elephant.
Can you see it?
It's easy to scale a mouse up in your head. But what scales in our head does not scale in reality - because values change at scale. And they scale non-linearly.
Here's some 17-century mathematical reasoning from my homeboy Galileo:
"The weight of an animal goes up as the cube of its linear dimensions, whereas the strength of its supporting limbs goes up only as the square."
Below is an excerpt from Garret Hardin's Filters Against Folly.
Suppose we compare two identically shaped animals. Animal A is 3 units long, while animal B is 6 units long.*
Weight of A = 3 cubed = 3 x 3 x 3 = 27
Weight of B = 6 cubed = 6 x 6 x 6 = 216
We can see that 216 is 8 times as great as 27; though animal B is only 2 times a long as animal A, it is 8 times as heavy.
As for the strength of their legs:
Strength in A = 3 squared = 3 x 3 = 9
Strength in B = 6 squared = 6 x 6 = 36
So B’s legs can only bear 4 times as much weight as A's legs.
But B is 8 times heavier (and has the same number of legs), so B's legs are only half as strong as they need to be (4 divided by 8). Clearly, something has to change as the length of the animal increases. If the material of which the legs are composed is the same, then the cross-sectional area of the leg has to be doubled.
The leg has to be thicker. This is not all. Since heavier bones will require more powerful muscles, many secondary changes in appearance will also be necessary, not to mention the behavior which must correlate with the lightness or massiveness of the body.
If mice evolved to be as big as elephants, their silhouette would be that of elephants.
This simple maths proves the point that a mouse cannot be as big as an elephant.
* I can hear you fact finders getting caught up in exactly what units of measurement are being used. This is why they remain blinded to patterns. Changing the unit of measure does not change the math or the implications of the math (effect of scale on values). Details come after the correct pattern is determined.
The mathematical difference is simple, but the practical conclusions that follow are profound.
In reaching the conclusion above, we have to do a little bit of calculation. But after that, we need only to remember the general pattern to understand the general implications of this "scale effect."
Were you able to scale the imaginary mouse to the size of an elephant in your head? If so, your conceptual framework failed to recognize a pattern of scale. The monkey mind struggles with the nonlinear.
You can see how this becomes a problem in trying to scale something, right?
What works to govern 10 people will not work to govern 150 people.
What works to govern 150 people will not work to govern a state, a country, or the world (see: the tragedy of the Commons)
What works at $40,000 in revenue will not work at $400,000 in revenue
What worked with 3 employees will not work with 30 employees
You can't just turn small things into larger versions of themselves. It might work in your head, but it will not work in reality.
Fortunately, you don't need fancy calculators or spreadsheets to understand this. You just have to remember the general pattern of the calculation.
Turning Patterns Into $ and Getting What You Want
Years ago, I met a woman that expressed to me on a Zoom call that she felt lost in her business. Without sharing too many details; it was an e-comm business that she stumbled into by accident.
Her buyers were raving fans and her product was amazing - I shared it with quite a few people.
After realizing she had something great, she made a mistake:
...hiring a bunch of coaches that don't understand general patterns of scale.
Unable to recognize the basic patterns of scale effect they all told her a version of the same thing:
"You are profitable selling 400 units a month from ads, so order 1,000+ units for inventory and spend 10x as much on ads. After that, we will move to 10,000 units and 100x on ads. Simple, right?'
"Just scale the mouse up to the size of an elephant."
Turns out a mouse cannot be the size of an elephant.
15 minutes into the call I was pretty sure I knew what was going on, I believed I could see the pattern. She was confused because I didn't need spreadsheets, calculators, or a ton of details to spot it.
How could I already see that there was a better path forward?
Her coaches have elaborate, detailed spreadsheets with all the metrics. Yet, they couldn't figure out why the small store wouldn't scale into a large one.
They failed to realize that a mouse cannot be the size of an elephant.
Their computations were accurate, but they were doing the wrong ones. We call this "good computation, poor mathematics"
I said something along the lines of:
"You do not have to trust me or pay me anything, I believe that I know what is happening. Send me all your data and I will verify and show you."
She sent me all of her data and I sent it over to my business partner at the time and said to him:
"Here is a bunch of data I don't want to go through. Tell me what would have happened if she:
1. Only bought 400 items of inventory each month
2. Turned off her ads as soon as they sold out"
This process is what we call the diagnostic - because we are lazy with naming things.
The Diagnostic Process
Step 1: The Solvable Problem
Q. Where are you now and what are you truly trying to accomplish?
A. Paraphrased: "I have X in inventory, Y in the bank account. My husband has a great career and makes plenty. I want to keep doing this because I love it and it's very important to me to contribute to my kid's school tuition. I don't need to pay for it, but it's important to me to do that, so I feel good about how I am spending my time"
The total needed to pay for the kid's education was $50,000 - $60,000 a year.
So what we are solving for is $50-60k a year.
At the time we spoke the business had been profitable before. It was profitable before hiring coaches. It has been operating at a small loss since.
Step 2: CASE Compile, Analyze, Strategize, Execute
At first glance, I had a gut feeling that she was already where she needed to be. (Most gut feelings are just pattern recognition). Ignorance to scale effect just caused her and everyone trying to help her to miss it.
One of the most important things she said to me was:
"I have about 300-400 people that buy the monthly special every single month"
That was enough to give the data to my partner and tell him what my gut told me:
"I am pretty certain that there is a point that she could stop running ads and close the cart. My best guess is that if she did that at 400 units she would be profitable - and profit diminishes after that.
Can you check her ads data, and sales data and confirm?
Then, do the calculations showing what it would look like if she had only ordered 400 units, turned off ads, and closed the cart"
I hadn’t seen her ads account or sales data for myself. I needed to confirm the pattern before getting into computations. Good mathematics starts with identifying the pattern.
The data:
Had she ordered 400 units and shut down the cart and the ads the moment the 400th unit sold, she would have averaged a little under $8,000 a month in profit.
That's $96,000 in profit, $36,000 more per year than what she was working so hard to hit.
How did we know where to look?
A mouse cannot be the size of an elephant.
Values change at scale.
Different things scale differently.
Function changes at scale.
Technically, scale should be determined by function. If the real function of the business is to have fun and make at least $60k a year, she should not scale.
Short video breakdown of the scenario above:
To Scale or Not To Scale?
It depends.
Another rule from world ecology:
"The scale of things determines what is functionally best"
Said another way; function must come before form.
Should you scale your business?
It depends on what function your business is meant to serve.
In the scenario above the business is to be a source of joy, and fulfillment and to fund something important. The answer is no. Scaling her business would get it further away from being functional given her preferences and priorities.
If the answer, for you, is "yes, I should scale my business" be careful not to confuse accurate computations with good mathematics.
Think of the elephant and the mouse and recall the underpinnings of the conclusion - what scales easily in your head will not scale in reality. Learn to recognize patterns.
Or don't.
Your life, your rules.
Nic
PS. There are hundreds of patterns we have identified and turned into frameworks for the Letter. At the time of writing this the Letter is at capacity and the cart is closed. If you’d like to be notified when it opens: